InvestorQ : Is the government really planning to cut interest rates on small savings instruments like PPF, Post Office deposits etc?
Juvina Maggie made post

Is the government really planning to cut interest rates on small savings instruments like PPF, Post Office deposits etc?

Answer
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Angel dcosta answered.
10 months ago


Here is what you need to know about the likely cut in interest rates on small savings by the government.

· Normally, the announcement of interest rates on small savings schemes for the January-March quarter is made by the government by December 31. This year it is critical because RBI has asked Ministry of Finance to align interest rates on small savings with market rates, so that banks are not put to disadvantage.

· RBI has told government the banks in India will need small savings rates to be cut because only then they can cut deposit rates and also lending rates. Till then, transmission is unlikely to happen.

· It needs to be remembered that small savings rates are reviewed every quarter and the finance ministry may decide either to modify the rates or to maintain status quo on the rates of interest applicable.

· While the general small savings rates may be cut, it will be interesting to see what it does with focused schemes at target audiences like Sukanya Samriddhi, Senior Citizens Savings schemes etc.

· The hope is that nudging the government to cut rates on small savings will mean that the RBI will also be in a better position to pass on rate cuts seamlessly to the borrowers and improve transmission. Today banks are afraid that if they cut rates then money may gravitate towards small savings.

· Interest rates on small savings schemes are on average 100-150 basis points higher than the rates offered by commercial banks. When this differential is combined with the tax benefits and exemptions on small savings, it surely distorts the yield curve.

Currently, most of the smalls savings rates are out of sync with market rates and need moderation to lower levels.